Medina and the sales tax

In my post after the debate, I wrote that Debra Medina, in advocating eliminating all property taxes and replacing them with the sales tax, had failed to address the issue of regressivity of the sales tax. That is not quite accurate. As a commenter pointed out, she did address it by saying that the Texas sales tax is less regressive than that of most other states because it doesn’t apply to food or drugs. But that’s not really an answer, because the sales tax is still a very regressive tax. When you eliminate property taxes and switch to sales taxes, that is a huge win for people who own property. For example, the top income decile in Texas earns more than $114,409 per year, according to the comptroller’s web site. A decile represents one-tenth of Texas households, some 777,000 households. Members of this income group pay 15.5% of the total sales tax revenue, but their sales tax payments represent just 1.6% of their income. People in the lowest income decile earn less than $10,250 per year. They account for a mere 3.2% of sales tax payments, but their tax payments represent 10.7% of their income. This is the regressivity problem in a nutshell. The incidence falls most heavily on the poor. Those in the upper income deciles pay more in sales taxes, but the tax burden is negligible compared to those in the lower income deciles. So, while Medina did address the issue — exemptions do make the Texas sales tax less burdensome than most — she did not address the fundamental unfairness that would result from replacing property taxes with sales taxes. We should also be concerned about what happens to local governments when property taxes are eliminated. Cities, counties, school districts, hospital districts, and community college districts depend upon property taxes for their revenues. If the property tax goes away, what happens to these governmental units? Sure, there will be more sales tax revenue. But sales taxes are the main revenue source for the state. There is tremendous competition for sales tax revenue–public ed, higher ed, health care, transportation, law enforcement, general government, environment, will all be competing for a piece of the pie. The property tax is an exclusive source of revenue for local government (except for school district revenues that are shared with the state). Lawmakers can’t get their grubby hands on property taxes. But they will be able to get their hands on sales tax revenue, and they will be able to divvy up the pie between local government and state government to the advantage of the latter. I think that’s what is behind the conservatives’ advocacy for an all-sales tax revenue scheme. They can control local government spending. Another issue is which tax is the more volatile, sales taxes or property taxes. I suspect it is sales taxes. When a recession hits, people reduce their spending. That’s why we’re down 10%+ in sales tax revenue. Commercial property values are volatile in a recession, but most residential property, at least in this state, and at least so far in this recession, has maintained its value. Historically, property taxes rise over time. Local governments are better off with property taxes as their primary source of revenue than sales taxes. This is a chart published by Comptroller Strayhorn. It has more recent data than I posted above: FINAL DISTRIBUTION OF EXEMPTION— BY HOUSEHOLD INCOME DECILE, TAX YEAR 2006 (in millions of dollars) Column 1 Column 2 Column 3 Range of Income Decile % of Sales Taxes Paid % of income spent on Sales Taxes Decile 1: under $12,820/Sales taxes paid $4.3M/ Decile 2: $12,820 to $21,797 13.0 1.1 0.2% Decile 3: $21,797 to $30,397 23.5 2.0 0.1% Decile 4: $30,397 to $39,743 33.4 2.8 0.1% Decile 5: $39,743 to $49,661 43.9 3.7 0.1% Decile 6: $49,661 to $61,734 52.5 4.4 0.1% Decile 7: $61,734 to $76,037 65.5 5.5 0.1% Decile 8: $76,037 to $96,693 81.5 6.8 0.1% Decile 9: $96,693 to $135,599 103.8 8.7 0.0% Decile 10: $135,599 and over 196.4 16.4 0.0% Decile 2: $12,820 to $21,797 13.0 1.1 0.2cile 2: $12,820 to $21,797 13.0 1.1 0.2%

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